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16 August 2011

South African Airways

Portfolio Committee on Tourism Meeting

SAA operates two airline brands: SAA; and Mango.

SAA Cargo supports the passenger business to promote trade.

SAA Technical and Air Chefs provide services to a range of international airlines.

SA Travel Centre sells SA destination travel products.

SAA is very clear on its mandate and strategic objectives as a State Owned Company, which include new route development, enabling tourism and creating employment in the economy.

Our Corporate Plan is targeting strong growth.

SAA is seeking to strengthen its tourism sectoral growth role and relationship with SA Tourism.

SAA Group

Premium airline Low cost airline Cargo airline/division

Aircraft engineering In-flight catering Retail travel franchises

Page 2

SAA Already Plays a Strong Role in South African Tourism

All SAA businesses strongly support the tourism sector


SAA has a major catalytic demand¹ effect on the tourism sector

SAA’s activity has four distinct channels of effect Direct impacts: activity and scale growth in the

aviation sector, e.g. airport infrastructure development, airport retail.

Indirect impacts: activity supporting non-aviation tourism infrastructure development, e.g. car rental, hotels, ground transport, tours.

Induced impacts: activity (consumption and investment) generated by those directly/indirectly benefiting from aviation activity.

Consumer welfare impacts: general benefits to South Africans from increased tourism access.

¹ Catalytic demand models (e.g. International Civil Aviation Organisation, US Department of Transport and Oxford Economics) are a key part of any holistic analysis of the benefits of aviation activity. They also form a major element of SAA’s support for New Growth Path, beyond its direct employment and KPI’s agreed with DPE in the Shareholder’s Compact.


Oxford Economics² recently valued aviation’s tourism sectoral contribution

Aviation’s catalytic effect on tourism in SA ZAR23.4 billion contribution to GDP (in addition

to the ZAR50.9 billion in other sectors). 116,000 tourism jobs created (in addition to the

227,000 created in other sectors).

² Oxford Economics were commissioned by the International Air Transport Association (IATA).

SAA’s estimated contribution to that effect SAA carries approximately 50% of inbound

passengers, so makes a ZAR11.7 billion GDP contribution and supports 58,000 jobs.

SAA Intends to Substantially Grow its Business

This will materially increase SAA’s tourism sectoral growth contribution

Passengers Forecast Medium term estimate 2010/11 2011/12 2012/13 2013/14

Revenue passengers 6 564 550 7 589 286 8 171 425 8 983 732 Business 643 026 918 291 1 015 141 1 149 459 Economy 5 921 524 6 670 994 7 156 284 7 834 273

SAA’s forecast passenger growth (SAA & Mango) is 37 % to the end of March 2014(Cargo growth forecast is 19.5% for the same period). This will increase SAA’s tourism sector GDP contribution and job creation, with direct job creation targets within SAA already agreed with DPE.

Current Challenges Facing the Aviation Sector in SA

Residual GFC effects, including low GDP growth forecasts

The propensity to travel tracks GDP Growth

Global demand growth rate has still not recovered to pre-GFC levels (leisure travel demand in particular).

Low GDP growth in most markets and periodic external shocks (such as the Japanese earthquake and volcanic ash clouds).

Continued economic uncertainty suggests low growth rates will remain for the short to medium term.


Higher fuel costs with some volatility

Fuel is approximately 1/3 of an airline’s operating costs

The Brent price moved above USD 100 per barrel in January and peaked at USD 126 in April.

Fuel is priced in USD, so airlines must manage commodity price and exchange rate risk.

Fuel price increases can only be partially recovered via passenger and cargo fuel levys.

Brent price August 2006 to August 2011. Source: Thomson Reuters


South African Transit Visas and baggage theft at South African airports

Transit Visa complexities and baggage theft drives passsengers away from SA Transit visas required for many

nations, including Lesotho, Swaziland, Namibia, Zimbabwe, Botswana and Mozambique.

Other African airports are easier to transit.

Johannesburg particulalry exposed to the relative efficiency of Nairobi and Addis Ababa.

Baggage theft remains very high and OR Tambo International is out of control.


High airport charges

South Africa’s airports are already high cost by global standards

In competitive developed market airport models, there is an element of negotiation with airlines (prior to construction) and there are alternative airports.

Airport charges projected to increase 129% from 2010 to 2015.

Airport charges are recovered by airlines through higher fares.


Excessive capacity being allowed for foreign airlines into South Africa

Demand is simply being redistributed to intermediary hubs

Capacity is being allocated far ahead of their home market origin and destination requirements.

The potential to grow direct services to South Africa is being reduced.

The end point of this loss of competitive ability by home airlines is a market like Australia (Qantas now exposed).

Canadian strategy/policy is to control capacity allocation in proportion to real demand.


More than half the world’s aviation capacity is now operating in open markets, with Africa still liberalising slowly. African states are reluctant to implement open skies with South Africa, however they enter into open skies type agreements with other African states (if their own airlines will not be affected) and non-African states, such as the UAE.

African aviation markets are only slowly liberalising relative to global markets

US-EU

AUS-NZ

ASEAN (2012)

EU


Almost all airline equity consolidation has occurred in open markets and South African airlines face competitors of much larger scale than five years ago.

Airline market consolidation is accelerating after the Global Financial Crisis

Delta-Northwest

Republic-Frontier-Mid West

United-Continental

America West-US Airways

TACA-Avianca

LAN-TAM

Lufthansa/Swiss-BMI-Austrian-Brussels

BA-IberiaAir France-KLM

Vueling-Click Air

These are the major airline mergers/takeovers in recent years

Malaysia Airlines-Air Asia

(announced)


SAA’s response to being an end of hemisphere carrier: re-design our network; capitalise on east-west traffic flows and our African strength for new route development; and strengthen the Johannesburg hub. End of hemisphere airlines, like SAA and Air New Zealand, are at a distinct disadvantage. Mid-hemisphere capacity growth into Africa is being primarily driven from the EU single-market or gulf nation states, such as UAE and Qatar.

Mid-hemisphere network carrier capacity increases

End of Hemisphere

Mid-hemisphere

End of Hemisphere

Mid-hemisphere airlines, such as Emirates, enjoy advantages of geography (they can operate to any major market non-stop), technology (longer range aircraft are being developed) and capital availability to purchase more aircraft).


Mid-hemisphere capacity growth: Emirate’s five year African gowth

July 2006

Passenger operations network & monthly capacity

Emirates: 13 destinations / 55,310 seats

Other activities

Emirates SkyCargo: 3 scheduled destinations

Destinations: 13Seats: 55,310


Mid-hemisphere capacity growth: Emirate’s five year African gowth

July 2011

Passenger operations network & monthly capacity 82.3 % increase over 2006

Emirates: 16 destinations / 89,504 seatsFlydubai: 6 destinations / 11,340 seats

Other activities

Emirates SkyCargo: 6 destinationsDNATA: Travelocity (online travel agency) & hotels

Destinations: 22Seats: 100,844

Network expansion to African destinations north of Johannesburg reduces the need to travel to South Africa as a destination or for transit.

Greater Coordination Required Between Aviation & Tourism

1. There is currently a lack of cohesion at a formal and practical level

SAA seeks to forge stronger links with SA Tourism

2. Joint Working Group between SAA and SA Tourism Develop a three year strategy and an Annual Working Plan for all markets. Planning and implementation monitoring at a corporate and field level.

e.g. SAA Regional General Manager Europe working closely with SA Tourism Head of Europe.

We will both benefit from forging stronger links and (first and foremost) tourism sectoral GDP contribution and job creation will increase.

Questions?

South African Airways - Portfolio Committee on Tourism

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